What's up at the Fed?

August 17, 2007 2:01 PM

A fairly lucid description of recent actions of the Federal Reserve.
posted by landis (86 comments total)

This is a good explanation, and Vox has a number of other analytical articles written by prominent economists, like What Central Bankers should do and why by Willem Buiter (who used to set interest rates at the Bank of England) and Fed Discount Rate cut: how, why and what it means and Subprime ‘crisis’: observations on the emerging debate by Charles Wypolsz.
posted by Aloysius Bear at 2:12 PM on August 17, 2007

Cool link(s), thanks
posted by mrnutty at 2:15 PM on August 17, 2007

Quite a lot of front page posts about this subject lately.
posted by Catfry at 2:26 PM on August 17, 2007

Quite a lot of front page posts about this subject lately.

Really, because we're all starving for J. Bush pregger wedding scandals instead of analysis of something that rules our collective existence.
posted by Burhanistan at 2:28 PM on August 17, 2007 [3 favorites]

Juicy. Thanks Aloysius.
posted by JaySunSee at 2:34 PM on August 17, 2007

I like this post Burhanistan. And I hope that any further posts on the subject will be of the same standard. In general, I think that the higher frequency of posts of a given subject there is, the better the quality ought to be. Although with increasing importance and newsworthiness, I think quality can be relaxed a bit.

I was just commenting in order to comment really. Practice my typing you know.
posted by Catfry at 2:43 PM on August 17, 2007

J. Bush pregger wedding scandals

I think there's a joke somewhere here about "injecting" "liquidity" into the "federal" "reserve", but it's not really coming together.
posted by GuyZero at 2:44 PM on August 17, 2007 [9 favorites]

My speculation is that the Fed did this to demonstrate to the markets that they believe mortgage-backed securities are good as collateral. They were trying get financial market participants to value mortgage pools sensibly.

No. They wanted the market to value mortgage pools the way they have been valuing them... much too high.

These operations are doing more damage; we've been refusing to allow our economy to ever suffer any kind of pain, for the last 25 years. These liquidity injections are the equivalent of morphine; they let the system ignore things that should be agonizing.

Like real pain, there's a reason we have it. It's to get us to stop doing something, or because something is wrong. Recessions are not bad for an economy; they give it strength, by pruning away waste and excess.

Since Greenspan took over, the Fed has been unwilling to ever let anything bad happen to the economy; the only acceptable outcomes have been 'boom' and 'less boom'. Booms feel wonderful, but they're very damaging, as people get lazy and wasteful. They overinvest, get indulgent... get sloppy, basically. Recessions force the economy to tighten up and get back on track; much like exercise, they're painful at the time, but ultimately good for us.

We're in the middle of the most fundamental and historic change in economics ever... well, at least since the Industrial Revolution. China, India, and all the other smaller players coming into the world is a huge deflationary force. They have (seemingly) endless, cheap labor. This should be causing us profound distress as we learn to compete and deal with the new reality of lower standards of living. When we're competing with people who can charge 1/10th what we do, it SHOULD be a gigantic struggle to even stay anywhere close to the same place, much less improve one's standard of living.

Had we started this competition process in the late 80s, I have no doubt we'd have been okay. It would have been twenty long, difficult years, with many business failures and lots of people upset at just about everything... but we would have learned to compete. We might even have prospered, in a world where we had to sell real goods to the world to pay for things we wanted.

Instead, we've been abusing our currency, injecting new money anytime there was any kind of a problem. Many of the world financial blowups over the last twenty years have been signals of deeper fiscal turmoil. It's not normal to have currencies failing all over the world... Mexico and the peso collapse, Argentina and their currency collapse, Turkey and THEIR currency failure.... this is not normal. These small economies were signaling profound distress. Argentina in particular failed because they tied their currency too tightly to the dollar, which was artificially high for a long time; this wrecked their local economy, destroying their ability to manufacture and compete, much as it did with us. ( I haven't studied Mexico and Turkey much, but it wouldn't shock me if the problems were similarly related.) When the debt party ended, people were literally digging through garbage for food to eat in a country filled with farms and cattle.

We have been too expensive to compete on the world market for a long time, just like Argentina, and we've been able to hide that fact from ourselves by going into massive debt, just like Argentina. I think we're going to be digging through garbage cans before it's all over, just like Argentina.

Being the world's reserve currency gives us enormous power to soothe our achy joints as we settle into senescence, but where maybe we just once had a bruise, and then a sore... now we have outright cancer, and they're still prescribing morphine.

They will, apparently, continue to do this until the world system seizes up and fails entirely. By refusing to allow recessions EVER, they have completely disconnected us from reality on the ground, and when the bills come due... we're going to find that we have no capacity left to repay them. All our manufacturing has gone overseas to cheaper markets.

Our mortage securities are wildly overvalued, but the Fed is trying to keep the global con job running.
posted by Malor at 2:45 PM on August 17, 2007 [41 favorites]

Admittedly, there's a reason why the general public prefers scandals about Lindsey Lohan or Paris Hilton to talk about the Federal Reserve: the latter bores them to tears. Personally I find it all boring, but J.Lo or A.Jo are slightly easier on the eyes than pretty much anyone hanging out at the New York Stock Exchange.
posted by ZachsMind at 2:58 PM on August 17, 2007

Thanks Landis.
posted by SeanMac at 3:03 PM on August 17, 2007

Thank you, landis. Finally a sane link about the liquidity crisis on Metafilter.
posted by mullacc at 3:06 PM on August 17, 2007

Thanks, Malor. Just in case y'all were wondering, every paper in the world is SCREAMING about this at the moment.

I think a few FPPs are warranted.
posted by chuckdarwin at 3:06 PM on August 17, 2007

oh, and thanks for the link landis. I really enjoyed it.
posted by Stynxno at 3:15 PM on August 17, 2007

Throw more dots!

Next time you hear a captain of the financial industry talking about his job, or a more regular person telling you the next get-rich-for-no-work-quick equivalent of how they're going to "flip a house" with their "stated income loan," tell them you're not really into Pokemon.

To wit: People don’t want to buy things that they can’t easily sell. If they are worried that a bond they are considering buying may be difficult or expensive to sell they will lower the price they are willing to pay, assuming anyone are still willing to buy it at all.

Replace people with Wall Street & corporations and this makes sense. This mindset is disconnected from the vast majority of people for whom I think the decision to buy something usually doesn't include considerations of selling it (& making a profit with no useful production!) And I think most people don't consider buying and selling derivatives of a security based on the right to service a loan of an abstraction of value. (Somewhere there's some dude sitting in an office thinking of another way to package and market some of these game token's he's got so that he can create another middleman position for him to fill.) And for too many people to lead a lifestyle of buying something for the purposes of selling it shows up as people flipping houses and a housing bubble/collapse. Just like tulips or stocks.
posted by TheOnlyCoolTim at 3:46 PM on August 17, 2007

*waves hands for Stynxno's benefit*
*shrieks, screams, and gibbers*

I'm still more or less right. I've been talking about this for years. My understanding is incomplete, as is everyone else's in this modern economic system, but if you want some background, look at my past posting history here. Also check sites like itulip.com and prudentbear.com. Doug Noland over there writes great stuff. He does, admittedly, have an irritating habit of using inappropriate caps every third word, but I think he understands the messed up system we have as well as anyone does, and far better than most.

The US is in the biggest bubble in the history of the world, and expecting an equally colossal wipeout is not lunacy.

Argentina is us writ small because they used our currency for all intents and purposes; they tightly tied their money to ours. They went through the exact same cycle we did, because they used our money. It messed them up bad, and it will mess us up just as much, though it will play out a little differently, because we won't have the currency conversion problems. The fundamental problem is exactly the same: a massive debt load combined with a destroyed manufacturing sector. Thus they, and we, had/have no ability to repay the debt.

We basically have two paths to follow: either a fast deflationary debt collapse, where most of the debts in the system are wiped out by default, or a slow, hyperinflationary collapse, as the Fed desperately monetizes the trillions of dollars in fictional assets that are evaporating. I think the latter is more likely, if they can avoid a wipeout. Slow pain always looks better than fast pain.

As is, the system is fundamentally unstable and cannot last. With our successive stock market, debt, and real estate bubbles, we have most thoroughly painted ourselves into a corner. Bubbles are the financial equivalent of a nuclear weapon, and in attempting to stop the fallout from one atomic bomb (the tech bubble), we set off two fusion bombs instead.... debt and real estate.
posted by Malor at 3:48 PM on August 17, 2007 [1 favorite]

Instead, we've been abusing our currency, injecting new money anytime there was any kind of a problem.

Injecting overnight loans into the federal reserve system is, merely, the Fed board telling people to chill out. No new money was created or destroyed by that act. As per the FPP.

There are problems with the way this crisis arose and arguably with the way it's being handled, but please obtain an understanding of the system.
posted by felix at 3:49 PM on August 17, 2007

Just like real nuclear war, the only way to win is not to play... to not have a bubble in the first place. The central banker's primary job is to take away the punchbowl anytime a party starts. In our case, though, Greenspan poured drinks himself.
posted by Malor at 3:53 PM on August 17, 2007

And your paragraph about Argentina makes literally no sense at all. The fact that they used our money and suffered a subsequent valuation collapse due to mismanagement has nothing to do at all with our present situation, in which excessive loan activity combined with complex (and non-trivially-explicable) financial instrumentation led to a perception of excess leverage, a very fast and difficult game of hot potato, and a resulting run.

The most rational explanation at this point is that you're a bear, you're short the market, and you're doomsaying to try to drive the market down even more, just like every other internet forum bear in the world right now. Which is fine, but do understand that it's transparent.
posted by felix at 3:56 PM on August 17, 2007 [2 favorites]

Glad you folks like the post. By the way, the Fed has cut the discount rate.
posted by landis at 4:06 PM on August 17, 2007

Okay I've read thru ..most of the link in question. As much as I can stomach. The questions posed by the FAQ are not questions I would like answered. Ignorant and worthless college drop out that I am, I understood most of the questions about as little as I understood the answers. FAQs are supposed to answer questions that are asked frequently. I'm not sure whose questions those were but they weren't mine.

1) How does this matter to me personally? Aside from the obvious fact that if hundreds of thousands if not millions of criminals and idiots in suits who stand between me and this illusion I've been told exists called the Federal Reserve don't actually do what they're supposed to do in order to perpetuate this illusion, the entire economy of this country may collapse, I don't see how this affects me in the least. Maybe gas goes up again.

2) Is there anything I can possibly do about it? No.

Dubya shoulda been listening, but he wasn't. If he had been listening, he woulda disagreed. Not my fault he's in there. I got no way of getting him out. This is a little bigger than the presidency anyway, and may have happened despite his stupidity and that of the yesmen he surrounded himself, tho I doubt it.

...

Wake me when we get an update on the Hollywood Rehab sitch. It matters about as much to me, and I can do about as much about it, but it's slightly more amusing.
posted by ZachsMind at 4:09 PM on August 17, 2007

Money that exists literally overnight, as a great majority of these repo agreements do, is still money, but only for that very brief period. In the grand scheme of things, given all of the repo, time deposit, commercial paper and other liquidity activity there is in the market, this comprises a very small drop in the bucket. Certainly nothing near to the money "created" every day due to the float, for instance.

Nothing is being prevented from taking place. The liquidity that was put on offer merely allowed these businesses to continue on that day in the face of short term panic runs. Since allowing them to fail would cause more panic runs and threaten the financial system with instability, the Fed stepped into express confidence in MBS/ABS. Note that they didn't repeat the big moves yesterday or today, so everything is now back to normal reservewise.

Your understanding of Argentina is bizarre. The Argentine problem arose because they pegged their currency the wrong way, causing their export business to dry up. The US has no such problem.

As far as 'fuck you' goes -- my opinions here are my own, but my day job is at a fixed income asset management firm that manages just a little under a trillion dollars. So I've got a pretty good vantage point -- perhaps better than someone who appears to get all his information from 'prudentbear' and 'itulip'.
posted by felix at 4:12 PM on August 17, 2007 [5 favorites]

It's not normal to have currencies failing all over the world...

Is the history of widespread use of fiat currency sufficient to know what is "normal?" It's only since 1976 that all the major currencies have been floating.
posted by grouse at 4:16 PM on August 17, 2007

They're still preventing the correct adjustments from taking place.

Que? Letting liquidity dry up in the interbank market is never the right answer to any given problem.
posted by Aloysius Bear at 4:18 PM on August 17, 2007

Your understanding of Argentina is bizarre. The Argentine problem arose because they pegged their currency the wrong way, causing their export business to dry up. The US has no such problem..

We have a current account deficit of over two billion dollars a day. What planet are you on that this isn't a problem? Our imports are now roughly 7% of our entire GDP, and historically, markets have punished countries severely at 5%. Small deficits can run forever, but not big ones.

Meanwhile, the Chinese and Japanese central banks are sopping up gigantic amounts of dollars and dollar-denominated securities; China has over a trillion dollars' worth, and Japan has a little less. Without this kindness of strangers, these problems would have been apparent much sooner.

As far as 'fuck you' goes -- my opinions here are my own, but my day job is at a fixed income asset management firm that manages just a little under a trillion dollars. So I've got a pretty good vantage point -- perhaps better than someone who appears to get all his information from 'prudentbear' and 'itulip'.

Well, from that, you could be a freaking janitor. And I think it's very funny that you accused me of having irons in this fire when, in fact, YOU do. I think you're scared to death; someone here may be spreading deliberate misinformation, but it's certainly not me. As Buffett says, when the tide goes out, you find out who's swimming naked... and from your aggressive tone, I wonder if your company has shorts on.

Sure, I could be wrong, but my comments here are for everyone's benefit, not mine.

And I wouldn't diss the itulip guys; they were saying 'Nasdaq Bubble' way, way before anyone else, sometime in 1998. I highly doubt anyone in your organization had any freaking clue in March of 2000 that a 5,000 Nasdaq wasn't sustainable... in truth, a 1000 Nasdaq wasn't really sustainable, but massive liquidity kept that bubble from entirely popping.

It sure looks like the piper's showed up with his bill. Maybe we can foist him off awhile, but he'll be back. He's always back.
posted by Malor at 4:43 PM on August 17, 2007

Is the history of widespread use of fiat currency sufficient to know what is "normal?" It's only since 1976 that all the major currencies have been floating.

Well, we don't really know what the history of fiat currency is, since, as you say, it's really only been in full force for about thirty years.

Over the very long span of history, fiat currencies ALWAYS fail, but it's not normal to have currency contagions all over the globe, collapse after collapse.

It's actually my belief that fiat money is the fundamental source of the problem, if that wasn't obvious from from my other commentary. Commodity money shows abuse much sooner, because the commodities leave the country and can't be replaced by a wave of the fiat wand.
posted by Malor at 4:47 PM on August 17, 2007

Malor: so do you think that the solution is to go back to the gold standard? Or what?
posted by grouse at 4:50 PM on August 17, 2007

Frankly I don't even see how any of this is remotely legal. Just generating cash overnight for a very brief period of time to temporarily offset actual debt. Conjuring up an invisible Peter so you can rob him to pay Paul.

I'm sure eonomists and people more versed in the ways and means of the world than my humble self would insist this is all perfectly legitimate and easy to understand. From my perch it looks like a glorified hornswoggle.
posted by ZachsMind at 4:57 PM on August 17, 2007

[a few comments removed - quit the fuck you fuck you talk or take it to email/metatalk]
posted by jessamyn at 4:58 PM on August 17, 2007

...yes ma'am.
posted by ZachsMind at 5:04 PM on August 17, 2007

Well, I'm not sure. I think one possible problem is that the gold industry is very small compared to most others, and it would be easy for big players to disrupt global pricing in very unhealthy ways. I'm not sure gold is the right answer anymore, but SOME commodity is, I think, necessary.

When governments can create money at will, very simply, they get dishonest. We need an external way to keep them accountable. If we keep using fiat currency, we'll keep getting crashes like this. Maybe not this LARGE, but it'll keep happening.

If there's one truth about money you can take from history, it's that the temptation to abuse the currency is always overwhelming, and that the results are always bad.
posted by Malor at 5:04 PM on August 17, 2007

"When governments can create money at will, very simply, they get dishonest."

I think that's the other way around. When governments get dishonest, one of the first things they do is they look for ways to generate money at will. If an individual or corporate entity is not a gov't, this is usually called counterfeiting. "Of course that's just my opinion. I could be wrong."
posted by ZachsMind at 5:09 PM on August 17, 2007

What planet are you on that this isn't a problem?

I won't speak for felix, but I doubt he or very many others would wave off this liquidity crisis or the various macroeconomic issues as 'no problem.'

Predicting a bear market or economic recession is perfectly reasonable, but that's a far cry from "digging through garbage for food to eat." Macroeconomics are notoriously difficult to predict and when I read over-the-top speculation like Malor's, I give it as much credence as I do the predictions of those who believed the NASDAQ would never stop growing at 20%+/year.

As Buffett says, when the tide goes out, you find out who's swimming naked... and from your aggressive tone, I wonder if your company has shorts on.

And here's what Buffett has to say about people who make macroeconomic predictions:

We spend essentially no time thinking about macroeconomic factors. In other words, if someone handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay attention to it.

posted by mullacc at 5:10 PM on August 17, 2007 [4 favorites]

I'm torn by the Discount move. It's a bad move. It basically say that the US *will* inflate to avoid the day of reckoning.

However, there was a very real run on Countrywide happening. Banks failing isn't a good thing, and the fact that Ben launched the Discount Helicopters is a sign that they were trying to save Countrywide -- which is basically a solid bank -- from being crushed in a panic. This is exactly why the Fed was created, after the 1907 Bank Panic, which was stopped by J. P. Morgan, the country decided they couldn't bet the economic future of the country on the actions of one rich man, and created the Federal Reserve as the bank of last resort.
posted by eriko at 5:12 PM on August 17, 2007

Zachs: the explanation that made the most sense to me is the overnight liquidity activity is a way for banks to close out intermingled positions.

If AA owes BB, BB owes CC, and CC owes AA, and neither will/can pay out until somebody pays them, you need an extra-market party with deep pockets to lend someone overnight money to get the unrolling party started.
posted by Heywood Mogroot at 5:17 PM on August 17, 2007 [1 favorite]

save Countrywide -- which is basically a solid bank

Countrwide's got $800M of REOs in California already, with the rate of increase still going up, and, even worse, every liquidation sale at the market-clearing price (50-70% of book) will both cost it asset-value AND further depress prices, putting other Countrywide customers MORE underwater.

As Ashleigh Brilliant once said: "I don't have a solution, but I certainly admire the problem."

As someone wanting to buy a simple 2B condo in my area at a 35% DTI ratio, I say let the mother burn. These suicide loans were what drove prices up 50% 2005-2006.

To modify Malor's analogy above . . . the Fed was handing out millions of boxes of free Krispy Kremes 2002-2006, and the nation gained 30lbs of unneeded fat thereby.

Getting back into shape is going to take some pain.
posted by Heywood Mogroot at 5:24 PM on August 17, 2007

"Getting back into shape is going to take some pain."

Yeah, that's what my girlfriend keeps tellin' me.
posted by ZachsMind at 5:36 PM on August 17, 2007

"If AA owes BB, BB owes CC, and CC owes AA, and neither will/can pay out until somebody pays them, you need an extra-market party with deep pockets to lend someone overnight money to get the unrolling party started."

Sounds to me the parties involved just need to meet face to face over drinks.
posted by ZachsMind at 5:37 PM on August 17, 2007 [1 favorite]

Just generating cash overnight for a very brief period of time to temporarily offset actual debt.

The Fed's overnight repos aren't directly related to the mortgage market problems (I assume that's what you meant by 'actual debt'). They're loaning money to the banks to keep the interbank market liquid. In this case, it's the size of the loans that are exceptional — there's nothing particularly remarkable about the Fed 'creating' money to loan to the banks.

It's not just the Fed that can 'create' money: ordinary banks can as well (and always have, whether we have fiat money or specie money). When you deposit $100, the bank doesn't have to keep it all there for you; it can lend out up to $90 (or more in Europe), which is spent by someone, and deposited back at a bank, which then lends $81 to someone else, and so on. This is fractional-reserve banking.
posted by Aloysius Bear at 5:43 PM on August 17, 2007

" It’s a bit like having a credit card with no limit where the bill never comes."
posted by hortense at 6:37 PM on August 17, 2007

Of course now all the "free market" suits at the top are going to ask bailout now that it's THEIR shirts that are going to be lost. Free market my ass.
posted by afx114 at 7:03 PM on August 17, 2007 [2 favorites]

When you deposit $100, the bank doesn't have to keep it all there for you; it can lend out up to $90

That's almost, but not quite it. When you deposit $100, the bank immediately lends out $900 and waits for some sucker to deposit some of it back.
posted by ceribus peribus at 8:35 PM on August 17, 2007

More interesting is the deviation of the federal funds rate from the stated target. They didn't just bring it back to target as stated in that linked article, they brought it to half a point below target, and it stayed there a few days. This is somewhat unusual, I think. It led to much speculation that they'll be setting the new target there if things don't quickly go back to normal, though it now looks like things will probably do just that for now, I think, maybe.
posted by sfenders at 8:57 PM on August 17, 2007

...but my day job is at a fixed income asset management firm that manages just a little under a trillion dollars...

Dude ... why are you reading MetaFilter?
posted by Wash Jones at 9:06 PM on August 17, 2007

Yet more exciting commentary on the thrilling fed funds rate action: "The effective rate is a weighted average and is being pulled down by trades at close to zero, which I think are due to the last trades of the day being excess reserves and have a lower reservation price. I don't think the median rate is computed, but if it was it would be more illuminating."

Yeah well, I'm sure this will probably make more sense in the morning.
posted by sfenders at 9:35 PM on August 17, 2007

Malor you've got a great turn of phrase on this stuff, for sure.
posted by bonaldi at 9:37 PM on August 17, 2007

I'm still more or less right. I've been talking about this for years. My understanding is incomplete, as is everyone else's in this modern economic system, but if you want some background, look at my past posting history here. Also check sites like itulip.com and prudentbear.com. Doug Noland over there writes great stuff. He does, admittedly, have an irritating habit of using inappropriate caps every third word, but I think he understands the messed up system we have as well as anyone does, and far better than most.

Appeal to authority.
Appeal to ignorance.

The US is in the biggest bubble in the history of the world, and expecting an equally colossal wipeout is not lunacy.

Appeal to nature.

Argentina is us writ small because they used our currency for all intents and purposes; they tightly tied their money to ours. They went through the exact same cycle we did, because they used our money. It messed them up bad, and it will mess us up just as much, though it will play out a little differently, because we won't have the currency conversion problems. The fundamental problem is exactly the same: a massive debt load combined with a destroyed manufacturing sector. Thus they, and we, had/have no ability to repay the debt.

Past performance does not predict future performance.
Anecdotal fallacy.

We basically have two paths to follow: either a fast deflationary debt collapse, where most of the debts in the system are wiped out by default, or a slow, hyperinflationary collapse, as the Fed desperately monetizes the trillions of dollars in fictional assets that are evaporating. I think the latter is more likely, if they can avoid a wipeout. Slow pain always looks better than fast pain.

Appeal to fear.

As is, the system is fundamentally unstable and cannot last. With our successive stock market, debt, and real estate bubbles, we have most thoroughly painted ourselves into a corner. Bubbles are the financial equivalent of a nuclear weapon, and in attempting to stop the fallout from one atomic bomb (the tech bubble), we set off two fusion bombs instead.... debt and real estate.

Appeal to fear.
posted by ogre at 10:37 PM on August 17, 2007 [4 favorites]

That's almost, but not quite it. When you deposit $100, the bank immediately lends out $900 and waits for some sucker to deposit some of it back.

Not so much ... he did say that the next bank can loan out $81 ... so you're right in essence that much more gets created from your $100 deposit but not all by the bank at which you deposited that $100. Many other banks get in on the action.

$X/rr or $100/.10 = $1000, not $900, but more importantly not all by one bank.

Assuming rr (reserve req) = 10%, which it does a.t.m.
posted by jckll at 10:48 PM on August 17, 2007

Appeal to authority.
Appeal to ignorance.

No, ogre, that's an invitation to go learn about this. I gave you a source, and told you what he said. You can go look it up for yourself. i suggest you do so, because I'm not even beginning to touch on all the myriad issues in play here. It has levels and levels of complexity that I don't fully understand. After spending the last six or seven years intermittently learning and watching the market, I'm of the opinion that NOBODY really understands it. But Noland's got a pretty good handle on things... so go look for yourself.

Appeal to nature.

Bubbles are historically followed by crashes. It's always happened before; there appears to be no reason to doubt it will happen again. If there is a reason to doubt that, you could actually provide some, you know, evidence. What bubbles haven't ended in financial ruin for many and vast pain for all? I can list many, many that have.

Past performance does not predict future performance.

Oh, please. You're completely reaching here. We can no longer use our brains to see how a situation played out, and use it to reason that a similar situation elsewhere may have the same results?

If I drop a hammer on my foot, it will hurt. If I do it again, it will hurt again. I can safely predict that dropping a hammer on my foot will hurt every time, unless I'm unusually lucky.

Appeal to fear.

I've been talking about this, off and on, since 1999; I've been warning and warning that we were due for a terrible crisis. In all that time, this is the first time I've gotten such pushback from people claiming that I'm a short-seller trying to profit from what I'm talking about.

My guess is that you people are really scared for the first time; you're realizing that what I'm talking about is very, very real. The fact that I'm getting such a strong negative response for the first time leads me to believe the actual collapse may actually be happening: rather than something that was inevitable, but coming someday in the future, it may have morphed into happening right now.

At the very least, I find this strong pushback an indicator of very real fear. It appears reality is finally getting into the mainstream, and you people don't like reality at all.

Time to wake up... it looks like the debt party is done.
posted by Malor at 12:51 AM on August 18, 2007 [1 favorite]

Injecting overnight loans into the federal reserve system is, merely, the Fed board telling people to chill out.

well, it's been my observation that when they haven't done it in the past week or so, the market goes down ... then they inject a bit of money, things even out for a little bit ... and then things go right back down

i'm not so stupid as to argue with a professional ... but i do know this - people are scared and it's starting to have a serious effect on the market

they're losing faith, felix ... what do you have to tell them that they're going to believe?
posted by pyramid termite at 12:54 AM on August 18, 2007

The question is what to invest in. I should think first and foremost would be one's own debt, ie. pay off any and all loans and debts. That way at least one has a house over their head even if all else goes to hell.

Beyond that, though, I dunno. Surely there are assets that are going to appreciate well above inflation.
posted by five fresh fish at 1:23 AM on August 18, 2007

I've been talking about this, off and on, since 1999...In all that time, this is the first time I've gotten such pushback from people claiming that I'm a short-seller trying to profit from what I'm talking about.

This is just the first time we've had a serious credit crunch since you've taken up the topic as your hobby-horse. I don't think you're a short-seller, but I think confirmation bias is sending you out of control. The markets are looking choppy, but so far the system is working as we expect it to. For your scenario to play out, there needs to be a catastrophic domino effect that takes out some major institutions. It simply hasn't happened yet and it isn't clear that it will. That doesn't mean I think things are peachy keen, but it's not obvious to me that we're heading into financial Armageddon.

Bubbles are historically followed by crashes. It's always happened before; there appears to be no reason to doubt it will happen again.

A crashing bubble =/= picking through the garbage for food. Not necessarily. Besides the only bubble that is bursting now is the subprime mortgage market. Maybe other markets will crash, but again, it hasn't happened yet.
posted by mullacc at 2:04 AM on August 18, 2007

Besides the only bubble that is bursting now is the subprime mortgage market.

The availability of cheap and easy money at absolute historic low rates in real terms led to an explosion in pricing, as everybody got involved. And the housing ATM has driven most consumer consumption for the last four or five years.

We had a virtuous circle on the way up. Easy money led to easy credit led to lots of new buyers. This led to house price inflation. The low default rate and the fabulous returns led to yet looser standards, leading to less qualified buyers entering, leading to higher prices, and so on. This circle continued to spiral like all bubbles do, until it reached the last people in the economy; this is called the Widows and Orphans phase. Suddenly, there's nobody left to fund any more growth cycles. And because the assets are fundamentally massively overvalued, the virtuous cycle turns vicious. Debt failures lead to tightening credit, which leads to fewer buyers, which leads to lower prices, which leads to more debt failures. The same factors that drove it so high will turn around and drive it startlingly low as well.

And because the entire economy is dependent on the housing ATM to fuel consumption and our 2 billion dollar a day borrowing binge, it will at the very least go into deep recession. I believe this will expose the rot in the core of the derivative system, the idea that spreading risk reduces it. It doesn't, because people take on more risk when they think they aren't running it themselves. I believe the entire system is rotten with bad derivatives, and I think there's a very good chance the whole thing will melt down.

And THEN we get to the fact that so much of our manufacturing has left the country; we have no way to make many of the goods we use every day. We depend on imports from all over the world, but we don't have anything real to send them to pay for it. I think picking through the garbage for food is entirely possible for a good chunk of the population.

The Fed may be able to pull some rabbit out of its hat and keep us tottering along awhile longer. But, ultimately, the system is unstable. It requires an ever-growing torrent of new credit, and the leverage that most large financial companies now have is terrifying. The derivative positions are vast beyond imagination. They reap the rewards of having ten times their actual assets, but if things go south, they take ten times the financial hit, too.

The system just can't keep doing what it's been doing. It can't. And there doesn't appear to be any easy way off this ledge we've climbed onto. The only two ways I see are ultimately either a deflationary or an inflationary collapse. If we patch it together and keep doing what we've been doing, we just make the eventual day of reckoning even worse.

Again: I think Argentina is a very good parallel.

As far as real solutions go: the real solution, if there is one, is going to be a generation or two of very hard work. Beware the demagogues; in times of crisis, they always come out of the woodwork and promise a way out. When things are very bad, equally terrible people can much more easily come to power.
posted by Malor at 3:55 AM on August 18, 2007 [2 favorites]

You've already said all this. When I said the only (currently) bursting bubble is the subprime market, it wasn't because I didn't understand the possible ripple effects. I merely wanted to point out where we are in reality (subprime markets shutting down) and where your predictions begin. Your rhetoric blurs the line between what has happened and what you think will happen.

I believe the entire system is rotten with bad derivatives, and I think there's a very good chance the whole thing will melt down.

This is the key to your argument, but it's conjecture. Derivatives are a convenient bogey man because they can be hard to understand and the notional value of the underlying assets provide great fodder for those who like to quote large numbers in breathless tones. And when investors in the riskiest of derivative strategies blow up, all the detractors think it proves their point. It doesn't and may actual prove the value of the risk-spreading capability of derivatives.

But, to be honest, I don't have much to argue with you on the specifics on the current situation. I've been a bear on the housing, MBS and high-yield corporate markets for a couple years now. But your line of reasoning goes beyond being bearish on the specific assets in question--you're using the current situation to try to tear down Keynesian economics and fiat money. But it makes you sound like a fear-mongering crank.
posted by mullacc at 5:48 AM on August 18, 2007

When I said the only (currently) bursting bubble is the subprime market

And the Alt-A market, and the Prime Jumbo market, and the 2005-2006 vintages of everything, and . . .

This chart illustrates the state of affairs we find ourselves in.

Mortgage debt steepened its hyperbolic curve 2002-2005, but is now topped out. TMK the flattening of the consumer debt segment was due to $800B to $1T of MEW activity each year from 2002-2005 funding consumption.

Without this equity extraction -- consuming the seed corn -- the US economy would have been in recession since 2001.

The math is really simple here. In bubble areas (most of the country), most of the loans 2003-1H07 were suicide timebomb loans that the borrowers will not be able to service indefinitely.

Remove these timebomb loan products, remove these idiot borrowers, remove the speculative premium that comes with the expectation of price appreciation, raise the mortgage rates 100 to 300bp, sunset the 2001-2003 tax cuts . . . you've got a market described in the song MacArthur Park.
posted by Heywood Mogroot at 8:30 AM on August 18, 2007

Malor, it is clear you have spent a lot of time reading and researching this topic, but just gaining knowledge does not, necessarily, lead one to the correct conclusions.

I don't think your posts here are trying to profit from short positions... I would be shocked if you didn't have short positions, but MeFi would be the wrong target for your campaign.

But it is clear this is your raison d'etre. I appreciate your passion, but with that comes a bit of responsibility. And with dozens of people favoriting your comments, you've obviously struck a chord, but I think your descent to hyperbole is problematic.

The federal reserve is functioning as it is designed. Their moves lately have been perfectly logical and reasonable.

They are beginning to engineer another "soft landing" of which we've had several.

Yes, there will be pain from this current situation, but there is no reason, at all, for people to run screaming in the streets waving their arms above their heads. Your "THE SKY IS FALLING!" posts assume a great deal of rigidity in the financial system, when the opposite is true.

Your hysterics are very reminiscent of the Y2K disciples, especially this nonsense of "eating out of trashcans".

The real estate market will retract, there is no doubt. This is not in and of itself a disaster. Those who live in most areas will likely have stagnant home values for a few years. Those who live in the wildly overvalued markets will suffer losses. Or, they could simply not sell their homes for a few years till prices stabilize. In a perfectly healthy market, real estate values tend to increase over time. So, given some time, prices will recover to their previous levels, albeit more slowly.

As the market cools and all the house flipping dies down, and people stop buying a new residence every 12 months along with 2 other investment properties to "flip", then the situation becomes perfectly sane.

Consider, you bought a house in 2006 outside Las Vegas for $550k. After the "collapse" your home becomes revalued at about $450k. This is a catastrophe only if you need to sell, or if you were on a short term balloon ARM.

If you acquired this house through normal mortgage channels, all it means is that your house is no longer an instantaneously liquid asset, just like housing has been for most of the last century. This, again, is not a catastrophe.

What it means is that your house has not gained 20% in value in 12 months, so that means you can't go buy a boat with the imagined "profit" from last year. Or, it means you can't sell your 550k house for 700k in a year so you can go buy a 900k house that was 500k 2 years ago.

Again, this will, OF COURSE, lead to lower consumer spending, but it is hardly a disaster.

Is this a serious concern? Yes. Realtors in particular are about to have a very serious change to their industry. I expect in 2 years you won't see a realtor office on every street corner and strip mall like you do now in many towns. You also won't have every other woman at your book club saying "I just got my real estate license!". You won't have dentists taking 2 days a week off work to be "general contractors" on their 4 investment properties.

Is the sky falling? No. Is financial Armageddon upon us? No. Is financial discomfort upon us? Absolutely.

The discomfort may range from ingrown toenail to wisdom tooth extraction.

In the financial sector, what people BELIEVE to be true, IS what is true.

If enough people believe the market will fall, then it will fall. It is entirely sentiment driven.

We had a "run on the bank" writ large. Investors/traders/fiduciaries panicked that they couldn't get their money (liquidity shortage), the Fed stepped in and quelled those fears, providing short term liquidity (but not "making money" in any real sense of the word). Traders calmed.

The system worked. Not perfectly, not instantaneously, not completely transparently... but it did work. Friday was a very different day.

The system cannot magically make bad news good, but it can, and should, and hopefully will, help to alleviate panic instincts and allow the market to work how it should.

Will things trend downward a while? I think so.

Will things bottom out tomorrow? Unlikely. There's simply no reason for it to. This is why we HAVE a central bank.

Also, comparing the tech sector fallout to the housing market is not exactly a good comparison. Both were driven by rampant speculation, but one is the very definition of a real asset, where the other was basically ethereal.

Put another way, Phone.com can drop to zero quite easily as there's nothing really there. A home in Malibu is not going to drop to $0. Ever.
posted by Ynoxas at 9:00 AM on August 18, 2007 [4 favorites]

Your hysterics are very reminiscent of the Y2K disciples, especially this nonsense of "eating out of trashcans".

you mean dumpster diving?

people are going through the garbage for food NOW in this country ... are you paying attention?
posted by pyramid termite at 9:44 AM on August 18, 2007 [1 favorite]

The real estate market will retract, there is no doubt. This is not in and of itself a disaster

Real estate appreciation has been pulling the train since 2001.

Borrowers have taken on FIVE TRILLION dollars of NEW mortgage debt obligations since then. These new trillions are currently pinging around the world economy. . .

From 2003-2006 people were taking out $800B+ of home equity and spending it EVERY YEAR. This is a stupendous amount of taking on debt to fund consumption.

Those who live in most areas will likely have stagnant home values for a few years. Those who live in the wildly overvalued markets will suffer losses

You're using "Bush Country" logic here apparently. Home prices appreciated MOST where MOST of the people were.

Sure, towns with one stoplight may have only appreciated 20% over the past 6 years. We're talking about CA, NY, MA, FL, NV, WI, MI, IL, WA. OR, MO, etc. however.

And people walking away from their poor purchase decisions 2005-2006 aren't the only ones who are going to suffer.

Their $10T debts are somebody else's nominal $10T assets.

In a perfectly healthy market, real estate values tend to increase over time

They respond to the capacity of debt servicing power of the population. We're tapped out now. Products that made buying temporarily more affordable are being withdrawn.

I think the drawdown will be on the order of the Japan experience. Prices peaking in 1989 then falling for 17 years.

Prices here were falling after our 1989 peak too, but first the dotcom booms and then the free-money lending policies 2002-2006 blew up the market way, way past affordability and equivalent rents.
posted by Heywood Mogroot at 10:09 AM on August 18, 2007

Let me be extremely clear; I have NO short positions whatsoever. None. I had some in 2000 and in 2002, roughly broke even on them, and gave it up as a bad business; it takes more knowledge and guts than I have to work the short side. The potential for profit is limited, and the potential for loss is infinite, at least in a market as crazy and disconnected from reality as the one we have now.

Your smears to the contrary are the most telling signs of fear that I have ever seen, and do more to convince me than anything else ever has that things are different this time.

hey are beginning to engineer another "soft landing" of which we've had several.

Maybe, but the system as a whole is on an inexorable slide toward collapse. The longer it takes, the more astounding gymnastics they attempt to keep in the air, the worse the eventual fallout will be.

The crunch that should have started in 2000 would have been tough but survivable. After 7 more years of wild excess, I am not so sanguine.
posted by Malor at 10:34 AM on August 18, 2007

it takes more knowledge and guts than I have to work the short side

"The market can stay irrational longer than you can stay solvent" -- JM Keynes
posted by Heywood Mogroot at 12:03 PM on August 18, 2007

Your smears to the contrary are the most telling signs of fear that I have ever seen, and do more to convince me than anything else ever has that things are different this time.

This sounds like Creationist talk to me.

Gotta agree, though: the higher up the debt is stacked, the harder the fall is gonna be.
posted by five fresh fish at 12:15 PM on August 18, 2007

I think the drawdown will be on the order of the Japan experience. Prices peaking in 1989 then falling for 17 years.

A situation similar to or a little worse than Japan probably wouldn't be so bad compared to what Malor is predicting.

I pretty much agree with most of what Heywood says here and other places (and I'm even a fan of an land value tax scheme, which one would hope gains popularity after a real estate crash. But I'm not gonna hold my breath.).
posted by mullacc at 12:45 PM on August 18, 2007

mullacc: in all seriousness, I hope to God I'm wrong. I would cheerfully and happily accept being wrong; I'd love to see us escape this mess relatively unscathed. I don't WANT to see the system collapse. I desperately don't want that. Being wrong would be a vanishingly small price to pay in comparison.

But, from my perspective, it looks as inevitable as the sun setting. We've just dug ourselves in too deep. There is no way on this Earth that we can pay all our obligations. It is not physically possible. When our creditors figure this out, we're in truly deep shit.

And, unfortunately, so are they. We have absorbed most of the world's savings for the last 15 years, and we've consumed and destroyed it, instead of investing it wisely.
posted by Malor at 1:09 PM on August 18, 2007

Malor: You've drawn a parallel between Argentina (2001-02) and the US (2007) several times on this thread. Let me side with felix's earlier comment and say that this comparison is incorrect and misleading.

Argentina fixed the exchange rate of the peso to the USD for several years. During much of this period it was running a large deficit on the current account of its balance of payments. To finance that deficit it was borrowing from foreigners in USD (and various other foreign currencies). Therefore it was accumulating debt to foreigners, denominated in foreign currencies. Confidence in the peso's fixed exchange rate ultimately disappeared and the peso crashed. Not surprisingly, the foreign currency debts that looked serviceable at the old exchange rate were unserviceable at the new, devalued, exchange rate. Hence the default on those foreign debts.

By contrast, the US has had a flexible exchange rate regime for quite a few years. The US has been running a large deficit on the current account of its balance of payments, therefore it has been accumulating debt to foreigners. However, the current account deficit has been primarily financed by borrowing in USD and therefore the debt owed to foreigners is primarily denominated in USD. What this means is that if the USD's exchange rate weakens (further) against other currencies, then foreigners who have been lending to the US in recent years will simply suffer a (further) capital loss on their USD-denominated assets.

Above I focused only on the key differences between Argentina (2001-02) and the US (2007). There are several other important differences, but I don't believe they are essential to the argument.

Also, for the avoidance of doubt, note that this comment is not intended to suggest that I think the current US economic situation is "good".
posted by gbognar at 1:44 PM on August 18, 2007

Ogre: "Past performance does not predict future performance."

Yes it can and I'll tell you why. Let me derail the thread a second from economic policy to governmental diplomacy.

This attitude that you can't learn from the past to forecast the future is essentially why Bush went to war in Iraq...

...and why Kennedy & Johnson went to war in Vietnam...

...and why Truman & MacArthur went to war in Korea...

...and why every violent act one person does to another has happened since Cain slew Abel (if you're a creationist) or Oog slew Ahg (if you're an evolutionist).

Those who do not learn from the past are doomed to repeat it. - George Santayana

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

If you put your hand on the stove before, and it burned you, doing so again will likely produce the same result.

The first time you were ignorant.

The second time you were stupid.

The third time you stopped being human, and began de-evolving, cuz you ain't using yer brain.

"Predict" may be too strong of a word, but one can hypothesize a given outcome based on past experience, IF they use their head.

Past performance can inform one upon future performance. Anyone who tells you otherwise is either selling something, or they never heard of DEVO.

We've been in financial dire straits before. The Federal Reserve was invented after the stock market crash of 1929, to keep that from happening again. I get that.

Metaphorically speaking, we collectively pulled humanity's hand from the fire and said "ouch!" Then we put an asbestos glove on our hand. Then we stuck our hand back in the fire. It's been there for a century. Asbestos may have saved us from the initial fire, but it's not exactly the safest material known to man, is it?
posted by ZachsMind at 4:07 PM on August 18, 2007

"Predict" may be too strong of a word

That was pretty much his point.
posted by Aloysius Bear at 4:20 PM on August 18, 2007

The Federal Reserve was invented after the stock market crash

Panic of 1907, actually . . . delayed by some Republican/Democrat dickering but it was eventually Wilson that got it (an essentially Republican plan) passed, buying off William Jennings Bryan by giving him the office of Secy of State, if my memory of the wikipedia article I read last week is at all accurate.
posted by Heywood Mogroot at 5:31 PM on August 18, 2007

The Federal Reserve was invented after the stock market crash of 1929, to keep that from happening again. I get that.

Normally I'd let this sort of thing go without comment, but in a comment exhorting us to learn from history, that's a strange thing to say. The Federal Reserve was created in 1913.

Advertising by BlagAds:
Federal Reserve Bank Discount Window
Fast liquidity injections, good credit or not.
US Federal Reserve: 5 out of 5 approved.
posted by sfenders at 5:39 PM on August 18, 2007

Yeah, so I was busy reading that "history" link, and learned this: In 2003 the Federal Reserve changed its discount window operations so as to have rates at the window above the prevailing Fed Funds rate and provide rationing of loans to banks through interest rates. Just to put that discount rate cut in context.
posted by sfenders at 5:41 PM on August 18, 2007

Argentina fixed the exchange rate of the peso to the USD for several years. During much of this period it was running a large deficit on the current account of its balance of payments. To finance that deficit it was borrowing from foreigners in USD (and various other foreign currencies). Therefore it was accumulating debt to foreigners, denominated in foreign currencies. Confidence in the peso's fixed exchange rate ultimately disappeared and the peso crashed. Not surprisingly, the foreign currency debts that looked serviceable at the old exchange rate were unserviceable at the new, devalued, exchange rate. Hence the default on those foreign debts.

This is an excellent summation. The ONLY difference us and them, despite the fact that you wrote a whole paragraph about it, is that we owe people with our own currency.

That just means we can print our way out of the debt, but dollars are not wealth, they are claims on assets and future production. Wealth is assets and the means of production, and we cannot pay back our loans. Their claims on our assets are just as good as ours; we will be competing against foreigners using our own currency to own the assets we need simply to survive.

Either we default and go into deflationary collapse, or we 'pay' our bills with printed dollars and go into hyperinflation. This will hurt us just as badly, if not more so, than our creditors. We end up either in 1929 or in 1971, but much worse in both cases.

Playing games with currency does not allow you to escape the consequences of overconsumption. You cannot devalue your way out of debt with fiat currency.

Argentina had fewer tools to deal with their problems, so they collapsed early and are mostly through their readjustment. We have many tools at our disposal to duck and dodge and run from our creditors, but the bills will still come due, and our tools have let us dig in ourselves in far, far deeper.
posted by Malor at 1:09 AM on August 19, 2007

grr. proofreading. 'dig ourselves in'.
posted by Malor at 1:27 AM on August 19, 2007

And, BTW, there's a pretty good chance that the loose fiscal policies of the early Fed are what led to the 1929 crash.
posted by Malor at 1:28 AM on August 19, 2007

Also note: this collapse probably isn't happening right now, especially if we're going to hyperinflate. But even if things don't crack up and go boom tomorrow, it is absolutely inevitable that they eventually will.

Law 0 of economics: things that can't go on forever, don't.

But, as Heywood pointed out, markets can remain irrational longer than we can remain solvent. :)
posted by Malor at 3:45 AM on August 19, 2007

Malor: You say, "Either we [the US] default and go into deflationary collapse, or we 'pay' our bills with printed dollars and go into hyperinflation."

With due respect, I think less hyperbole would be more credible.

"Deflationary collapse": The financial health of economies with chronic deficits on the current account of their balance of payments can (be) improve(d) through restraint of their domestic demand. Sometimes such restraint comes about as a result of a market-driven process (e.g. foreign lenders become reluctant to provide incremental financing, therefore forcing the borrower to retrench). In other cases, the restraint is due to government policy (e.g. tax increases and/or fiscal expenditure cuts by a government that wants to reduce dependence on foreign creditors). These scenarios do imply below-potential economic growth during the adjustment period. But they don't necessarily imply either "deflation" or "collapse".

"Hyperinflation": In situations when a government has taken on too much debt in its own currency and/or when private borrowers have taken on too much debt in their country's currency, periods of surprise inflation can sometimes help alleviate this burden (as long as most of the debts are not inflation-indexed). By surprise inflation I mean inflation which, for a period, exceeds the nominal interest rate paid on the debts in question (thereby eroding the real value of the debts). Bringing about inflation of this type requires accommodative/expansionary monetary policy by the country's central bank (i.e. it has to print enough money). However, surprise inflation doesn't necessarily imply "hyperinflation" (which is a term usually applied to inflation in excess of an annual rate of 100%).
posted by gbognar at 4:30 AM on August 19, 2007

Per the GAO, the government alone has debt and social obligations exceeding fifty trillion dollars in present value. That means we need to have fifty trillion dollars in the bank, right now, earning interest, to be certain of paying back all our obligations.

Add to that the gigantic amount of private debt, and maybe you'll begin to understand the scope of the problem.

We can't pay these debts. If we try to do it with currency devaluation, it will run away from us, because people demand to be repaid with value, not dollars. There isn't enough value in our system to pay those bills, so attempts to cheat creditors will result in a runaway inflation.
posted by Malor at 5:59 AM on August 19, 2007

That means we need to have fifty trillion dollars in the bank, right now

At present levels of taxation and expenditure.

Cut the DOD back 50% over 10 years, morph Medicare into national single-payer, let the 2001-2003 tax cuts sunset, raise the FICA cap, and the infinite-horizon fundiing problem shrinks substantially.

I do agree thought about consumer debt levels. I don't know how to fix that :)
posted by Heywood Mogroot at 9:49 AM on August 19, 2007

But even if things don't crack up and go boom tomorrow, it is absolutely inevitable that they eventually will.

No, it's not. There are any number of things that could happen. You need to quit speaking with such declarative statements and quit screaming for people to listen to what you are saying.

The American economy is a strange and wonderful beast, mysterious to all. For instance, if you had said in 1996, when gas was $1.30/gallon, that we would have $3.50/gal gas in just a few years, most financial pundits would have said there would be immediate economic collapse, that food would rot in the fields because it would be too expensive to ship, and that mass starvation would hit the urban centers. They would have predicted rioting in the streets.

but dollars are not wealth, they are claims on assets and future production

No they are not. Where do you get this? Dollars are merely currency, financial instruments to facilitate transactions. Dollars have value for one reason and one reason only: other people are willing to take them in trade for goods or services. They are backed by nothing. You don't get to go trade your dollar in for a piece of granite from the Washington Monument.

There is nothing in the world that matters if we print a billion or a trillion or a quadrillion of them... the only thing that matters is that people start asking for more of them if you print too many. That's inflation. A little inflation is natural, normal even, in a non-closed economy. The Fed SHOULD be injecting funds. Prices SHOULD rise, *MODESTLY*, over time. There is nothing odd, obscure, strange, or mysterious about any of this.

That means we need to have fifty trillion dollars in the bank, right now, earning interest, to be certain of paying back all our obligations.

No, it doesn't. You're starting to lose what credibility you had earlier in the thread.

If you have a mortgage for $250,000 then it would be absurd to expect you to have at least $250,000 to pay it back. That is not, nor is it reasonable to expect that is, the "only" way to repay that debt.

If that were true, then if you don't have enough money in the bank, today, to pay for all the rest of the cumulative expenses in your lifetime, then you are insolvent and should shoot yourself because things are hopeless.

Things are not hopeless. Things are a long damn way from hopeless. Things are not good, no. It would be better, all things considered, to not have this current problem to deal with.

There are several things that can, and I expect will, be done to address this. Some may be painful to the average consumer, some may go by unnoticed by all but market specialists.

I expect a downturn. I expect some pain. I expect some terrible losses in some industries. For one, I expect we simply will not have an American auto industry in 10 more years, and perhaps not in 5.

But the sky is not falling. For the sky to be falling, the Fed and all the commercial credit entities of the *WORLD* would have to simultaneously say "fuck it, we're not even going to try". That is not going to happen.

I don't expect some sort of miraculous instant recovery (though stranger things have happened)... but there is a *LOT* of room between "everything's fine" and the "financial Armageddon" and "eating out of trashcans" you are predicting.

If you think the heads of all these financial institutions are going to just throw up their hands and say "well, we deserved it", you are delusional.

But, there are no guarantees. If enough people in the market believe the way you do, then the market makes its own reality. It could crash tomorrow, but only because of human frailty, not any sort of unrecoverable flaw in the system.

Put a totally different way, jumping off a 20 story building, and rappelling off a 20 story building, have the same net result, you are on the ground, but the experience is markedly different, and one is clearly superior to the other.
posted by Ynoxas at 9:02 PM on August 19, 2007

Ynoxas: the American Way of Life was put on credit cards and HELOCs 2001-2007. This was not sustainable.

The $50T infinite-horizon funding problem is a sympton of this.

While it is the difference between expected revenue and expected expenses over the next zillion years, we will start seeing greater pressures when Medicare blows up next decade and the SSTF starts wanting its money ($3T+) back from the General Fund the decade after.

The only thing we make that the world wants is Hollywood movies, CDOs, and T-Bills.

We used to have ownership positions overseas but now we are a net ownee not owner. 1/15th of our economy is being sent overseas every year.

As for expectations, I don't have the first clue how this is going to unwind, other than it is. . . . when people can't get jobs and can't get on welfare they end up eating out of garbage cans, so I don't find that prediction that outlandish, but on the other hand this nation can and will feed itself, given our incredible productivity in this sector.

It could crash tomorrow, but only because of human frailty, not any sort of unrecoverable flaw in the system.

This is bullshit. While sentiment is important, reality is cold hard cash. Who has it, who had it, and why it got transferred.
posted by Heywood Mogroot at 9:12 AM on August 20, 2007

The math is really simple here. In bubble areas (most of the country), most of the loans 2003-1H07 were suicide timebomb loans that the borrowers will not be able to service indefinitely.

Most of the baloney in this thread is a total waste of time to even read, especially the Argentina nonsense, but this one stuck out, so allow me to use it as a jumping off point.

Less than a fifth of the loans during that period were anything that could be remotely described as 'suicide timebomb' loans. The number of crazy mortgages went up, but it didn't consume half the market. NINJA loans make great copy for newspapers, but most buyers continued with the old standbys of 15, 30 year fixed.

The people with truly crazy mortgages and no way to service them will lose "their" houses, because they made imprudent financial decisions. The people who invested in the pools in which the truly crazy mortgages were held will also suffer some loss due to foreclosure/bankruptcy proceedings, but the house is still a house and will be sold to cover the debt.

That said, I wouldn't be surprised if only 25% of the NINJA pool defaults in a worst case scenario. People find money to pay for houses.

But let's assume for a second that we have some insane, never before experienced cannibal holocaust scenario and house prices drop 20% across the board. This would be a savage, shocking loss in wealth that would be about equivalent to the equity market crash of 2000-2002, which resulted in the mildest recession in recorded history.

There are absolutely problems in the system, and a lot of "money" is going to be lost by somebody.

I am not your financial advisor. But neither is 'itulip.com'.
posted by felix at 10:14 AM on August 20, 2007

Less than a fifth of the loans during that period were anything that could be remotely described as 'suicide timebomb' loans

I was talking bubble areas during the bubble times. You are apparently not.

What I consider timebomb loans:

Much of Alt-A (stated income, 0% down, adjustable)
2/28s qualified on the teaser not the back-end
Most Subprime borrowers
Most IO adjustables, all Neg-Ams

OVER HALF of the lending in California 2005-2006 was Alt-A and subprime. Nearly all of these people will be up shit creek if/when they want to refi out of their current/future loan obligations. And even the segment making their mortgage will have to cut back on other expenditures to do so.

The house ATM is OFF. This alone was pushing hundreds of billions of dollars into the economy every year, 2003-2006.

and house prices drop 20% across the board

The gains of 2004-2006 were overwhelmingly due to unsustainable lending practices, from subprime to jumbo prime. The lending rules have changed . . . if they remain as they are, theory and experience (eg. US 1989-1995, Japan 1989-2006) says prices will HAVE To return to the trend eventually.

which resulted in the mildest recession in recorded history

A recession we would still be in if the PtB hadn't spurred the nation to borrow $5T against rising land values, and another trillion or two in T-bills from our friends overseas.

The longer a recession goes, the worse it gets.
posted by Heywood Mogroot at 10:35 AM on August 20, 2007

I was talking bubble areas during the bubble times. You are apparently not.

Your exact quote (bold is mine):

The math is really simple here. In bubble areas (most of the country), most of the loans 2003-1H07 were suicide timebomb loans that the borrowers will not be able to service indefinitely.

It's nice to see something of a retreat from your earlier hyperbole now that you're talking 2005-2006, putting specific if wide conditions on the loans, and drilling down to California only. But even there, I'm definitely not seeing your 'over half' stated figure in the numbers, and I have pretty good numbers.

In any case, we'll see in a couple of years who turned out to be more right -- the cannibal holocaust people or the financial guys. My money is on (B).
posted by felix at 2:02 PM on August 20, 2007

But let's assume for a second that we have some insane, never before experienced cannibal holocaust scenario and house prices drop 20% across the board. This would be a savage, shocking loss in wealth that would be about equivalent to the equity market crash of 2000-2002, which resulted in the mildest recession in recorded history.

As I've said many times, the reason for that was the wild Fed reliquefication efforts. We haven't paid that bill yet. We will, with a great deal of interest.

To prevent the fallout from an atomic bomb (the Nasdaq bubble), we set off a pair of fusion bombs, the debt and real estate bubbles. We put the system on a completely and ridiculously unsustainable path. We're on a mine cart, plunging into the darkness at ever-increasing speed, and unless something freaking magical happens, a wipeout is absolutely inevitable.
posted by Malor at 2:03 PM on August 20, 2007

You had me at the simultaneous reference to three nuclear weapons, a runaway mine cart and an appeal to a higher power. So what thickness of aluminum foil do you think would be truly sufficient to reduce the penetrating power of the Fed's orbiting mind lasers?
posted by felix at 2:28 PM on August 20, 2007 [3 favorites]

But even there, I'm definitely not seeing your 'over half' stated figure in the numbers, and I have pretty good numbers.

My numbers are coming from the Credit Suisse report from March.

My general point was, and is, that most of the run-up in prices after the market digested the 2001-2003 tax cuts was due to suicide loan products pushing affordability temporarily down.

For a general appreciation of the scale of suspect lending 2003-2007, one just needs to look at the loan products that have been recently withdrawn . . . combinations of subprime / stated, jumbo with low risk premiums, Alt-A, 100% plus CLTV. . .

The BULK of the lending products that drove the market up 2003-2007 have been withdrawn.

How we are going to support the $5 TRILLION dollar overhang is the question now.

I dont share Malors doom-gloom above, I wouldn:t be surprised to see a Japan-like step-by-step decline into generalized pain and suffering over the next 5 plus years.

Given how the only way the economy stayed out of recession 2001-2005 was mortgage equity withdrawal, this implies we are heading into a 5-plus year recession.

5 years from now, the crystal ball shows a national debt well over $10 TRILLION, Medicare deficits blowing through its trust fund, and the SSTF trust fund surplus beginning to shrink, towards their ca. 2020 net-zero point.

Happy happy Joy Joy.
posted by Heywood Mogroot at 3:10 PM on August 20, 2007

So what thickness of aluminum foil do you think would be truly sufficient to reduce the penetrating power of the Fed's orbiting mind lasers?

come on, felix, you need GOLD foil for that

but seriously, i think at the least, we're headed for a recession and our chances of another depression are greater than they have been for quite some time

it's my belief that although there are local markets that certainly have their housing bubbles, the size of the bubble is exaggerated ... what people fail to count in is that we've added 100 million people in this country since 1970 ... why wouldn't housing prices go up? ... simple supply and demand, and yet i hardly ever hear anyone mention this

still, the amount of bad loans that are out there is disturbing ... and no one really knows how much there is, only that it's too much to be safe ... hell, if they knew, we'd have our nasty little correction just like that and get it over with, wouldn't we?

i don't think the current situation by itself is enough to tank the economy ... my worry is that other things might come along ... war with iran ... discord (or a financial downturn) in china ... a natural disaster ... peak oil ... further problems with the effects of global warming ... another major terrorist attack

that's the way history often works is that you don't get one problem at a time but a whole crapload of them ...

perhaps a healthy economy and a healthy government budget can deal with the current situation ... but what gives anyone the idea that we're guaranteed that level of health?

not too many people saw it in 1929 either ... and as far as i'm concerned the argument that "well, if you keep predicting it long enough, it's bound to happen" is a lot like saying "well, if you keep predicting that cigarettes are going to give me cancer long enough, it's bound to happen"

perhaps we'll duck the worst case scenario and just suffer a little this time ... i will make one rather bold prediction ... the last two generations are not the kind of people who are going to go through garbage cans and stand in soup lines meekly ... so if the shit does hit the fan, there's going to be a lot of pissed off people with guns demanding action

you'd better be right
posted by pyramid termite at 8:51 PM on August 20, 2007

simple supply and demand, and yet i hardly ever hear anyone mention this


p.t., outstanding mortgages doubled from 2000-2006, from $5T to $10T.

There were four prime movers: prices were depressed coming out of the 1989-1996 dead zone, the IPO lottery jump-started the Bay Area market, which later spread the wealth outwards, the tax & interest rate cuts basically resulted in people bidding up housing prices to match the increased affordability, and finally the abandonment of all sane lending standards -- neg-am, stated, sub-700 FICO, non-owner-occupied -- the works -- allowed anyone with a pulse, and some without, to bid up prices even further, to where we are now in (nearly) all markets of any size, from Billings MT to Phoenix, from OC to LI.

I saw Japan's decline first-hand 1992-2000. It wasn't horrible, but I was in Tokyo where capital was concentrating. Where the pain really fell and will fall here is communities that can't pull their own weight economically.
posted by Heywood Mogroot at 9:06 PM on August 20, 2007

what people fail to count in is that we've added 100 million people in this country since 1970 ... why wouldn't housing prices go up? ... simple supply and demand, and yet i hardly ever hear anyone mention this

There has also been increased migration from rural and small-town living, to the cities.
posted by five fresh fish at 10:23 PM on August 20, 2007